High-Performance Insurer of the Future

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Insurers must transform to overcome the challenges of the post-recession business world—but how? Using Accenture High Performance Business research, we identify six business models that insurers should consider.

After a decade or more of high profitability, the insurance sector faces a starker future in the wake of the recent recession. Low gross domestic product growth, commoditization of insurance products, low interest rates and intensifying competition from intermediaries will affect the profitability of insurers. On the other hand, a changing consumer landscape, new sources of growth and the consumerization of IT all offer opportunities.

One thing is clear: insurers must equip themselves to meet these new challenges. This groundbreaking paper details the trends shaping the insurance industry and the six business models that can help guide insurers’ transformation plans—enabling a return to growth and sustainable high performance.

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High-Performance Insurer of the Future

  1. 1. The high-performance insurer of the future By Hendrik C. Jahn, Alexandra Gazendam and André Schlieker
  2. 2. Contents Contents 2 The changing face of competition 26 Executive summary 3 1. The return of the broker 26 High-performance insurers of today 4 2. The rise of the aggregator 26 3. New players 26 Five forces shaping the industry 7 4. From payer to provider 26 Shifts in growth 8 The new normal 28 Aging populations 9 1. Slow GDP growth 28 New infrastructure investments 9 2. Low long-term interest rates 28 Rising middle class 11 3. Increased regulation 29 Low-income rural communities 11 4. Commoditization 29 Attractive growth markets and segments 12 5. Stronger role of intermediaries 29 Impact of the new normal 29 Consumerization of IT 16 High performers need agility and flexibility 30 1. Going mobile 16 2. Digital marketing 17 18 The high-performance insurer of the future 31 3. Analytics Increase in risk and regulation 20 Market-related requirements for high performance 31 1. Increased frequency of catastrophic events 20 Business models for high-performance insurance 32 2. Risk inherent in the lucrative emerging middle classes 21 Industrializers 2.0 33 3. Demographic shifts in core markets 21 Value Pickers 35 4. Uncontrollable social media attacks 21 Global Conquerors 36 5. Increased regulatory intervention 22 Emerging Titans 37 6. Increase in cyber crime 23 Risk Masters 39 Brokers 2.0 40 Changes in consumer behavior 24 Success not assured 40 Loyalty on the decline 24 Different models: common principles 42 Clear channel preferences 24 Heterogeneity in emerging markets 25 Conclusion and outlook 43 Multi-dimensional view of customer a necessity 25 2 | The high-performance insurer of the future
  3. 3. Executive summary The last decade has been quite successful for the insurance industry. Across the globe we have seen relatively stable growth rates in all lines of business, and profitability levels higher than in many other industries. High performers have yielded returns on equity of 20 percent and above over a long period of time. However, times have changed. With the financial crisis the pressure on growth and profitability has risen and will increase over the next years through slow gross domestic product (GDP) growth, commoditization, low long-term interest rates, intensifying competition from intermediaries, and an increase in regulation. As a consequence, insurance will be less attractive to investors. Other factors that are likely to have a profound effect on the industry—but which are as likely to create new opportunities for insurers as they are to pose a threat—are shifts in the sources of growth, changes in consumer attitudes and behavior, and the consumerization of IT. The key question for insurance companies worldwide is how to take appropriate counter-measures to improve costs and profitability, generate growth, and stay on course to achieving high performance under changed market conditions. The ongoing Accenture High Performance Business research initiative recently concluded specific research into the insurance industry. Building on that research, we have analyzed which forces will shape the industry over the coming years and how they will affect competition and performance in different regions and different lines of business. These forces will change the rules of the game quite dramatically, usher in a “new normal”, and determine which strategies are likely to be successful in the future. Using this analysis, we have developed six business models which we believe will help insurers make progress in their journeys toward high performance over the next few years. Each model is made up of several dimensions, such as operating model, governance and defining capabilities, allowing insurers to compare their current model with the ideal state represented by the different models. Of course, given the five-year horizon, none of the models represents an exact recipe for success, but they do act as clear indicators of direction. This report provides a broad overview of the major trends and forces affecting the insurance industry, and offers some possible models for future success that can open up a very fruitful discussion within the senior management team. 3
  4. 4. High-performance insurers of today What does high performance mean and how can organizations increase their chances of becoming highperformance businesses? These are the driving questions behind an ongoing Accenture program of original research that is now entering its eighth year. Accenture is monitoring more than 6,000 companies across all industry sectors to understand what it is about some organizations that enables them to achieve consistently superior performance over a sustained timeframe, across business cycles and industry disruptions and cycles of CEO leadership. We define “high performance” as enduring or sustained outperformance of peers as measured by a set of widely accepted financial metrics. These metrics each define a core and distinct aspect of performance, and together they portray a comprehensive picture of business performance. The methodology for measuring and identifying high performance businesses across industries encompasses six measurements of high performance, namely growth, profitability, market perception, capital strength, cash and consistency. When applied to the insurance industry, we define these metrics as shown in figure 1. As part of the Accenture High Performance Business research program we recently defined the high-performance insurer. This study1 analyzed more than 70 leading carriers across the 15 key performance indicators listed in Figure 1, and gives the most up-to-date perspective on how the economic crisis has affected insurers, and how it has changed the market itself. In order to enrich the analysis, we included 4 | The high-performance insurer of the future Figure 1. Metrics for high performance in insurance Criteria Definition Period Growth Total premiums Three years compound annual growth rate Total premiums One year Growth in capital Three years compound annual growth rate Return on equity after tax Three-year average Return on equity after tax One year Return on equity forecast One year Return on equity forecast Two years Total return to shareholders Three years compound annual growth rate Credit rating Current Solvency ratio: premium/surplus One year Solvency ratio II: surplus/assets One year Cash Cash/total assets One year Consistency Consistency of premium growth Three years Consistency of return on equity after tax Three years Consistency of total return to shareholders Three years/two years/one year Profitability Market Perception Capital Strength Figure 2. Leading life insurers: profitable growth matrix (2006-2009) Median: 1.1% 20% 15% 10% ROE (3-year average) 5% Aflac Great-West Nationwide Life Lifeco Insurance Principal Financial CNP Swiss Life ING Old Mutual MetLife Aegon Mediolanum Unum Prudential Group Financial Manulife Financial Sun Life Financial Aviva Median: 8.0% Prudential Plc New York Life Insurance 0% Storebrand -5% -10% -15% China Life Insurance Legal & General -10% -5% 0% 5% Premium Growth (3-year CAGR) Sources: Accenture Research based on ISIS, Bloomberg, company data 10% 40% 45%
  5. 5. operational metrics such as combined ratios and expense ratios in our analysis of the carriers. Our analysis is shown in the graphs alongside for life, property and casualty (P&C) and multiline insurers. If we look closely at the high performers mentioned, we can observe that they are very different in terms of their geographic footprints, products and services offered, and strategies. Nevertheless we identified a set of five key attributes common to all: 1. Effective customer-centric distribution. This distribution model includes the sophisticated use of data to analyze and segment markets, and to create the right products. It also includes the development of multichannel distribution strategies that give insurers a powerful advantage in the marketplace. Mapfre, for example, has distinguished itself in this area, securing a leading position in the top right quadrant of Figure 6. It has achieved this through effective branding (giving it 79 percent unaided brand awareness in 2009), an efficient tied agent network in which 90 percent of new agents contract themselves to the insurer within a year, and a string of successful bancassurance alliances. 2. Responsiveness to the market. Companies with this capability are good at spotting opportunities and risks before anyone else. They are quicker to get into or out of markets, to launch or modify their products, and to take advantage of new technologies. This approach has enabled Aflac to become the market leader in the niche medical products segment in Japan, while QBE has concluded 125 successful acquisitions in 25 years by focusing on niche and targeted acquisitions which are share price accretive in short order, and by displaying superior skills at both identifying valuable targets and completing the transactions successfully. Figure 3. Leading life insurers: premium growth and expense ratio (2006-2009) Median: 1.1% 0% 10% Nationwide Life Insurance Life Expense Ratio (3-year average) Aviva CNP Swiss Life Principal Financial Mediolanum Prudential Plc 20% Great-West Lifeco Aegon 30% Legal & General ING Unum Group 40% 50% -15% -10% China Life Insurance Aflac Storebrand Median: 26.8% New York Life Insurance Sun Life Financial Manulife Financial 0% -5% 5% 10% 40% 45% Premium Growth (3-year CAGR) Medians: premium growth includes all the peers, while Life expense ratio excludes MetLife, Old Mutual, Principal Financial and Prudential Financial. Sources: Accenture Research based on ISIS, Bloomberg, company data Figure 4. Leading P&C insurers: profitable growth matrix (2006-2009) Median: 1.0% 30% 25% Sampo 20% Travelers Chubb 15% ROE (3-year 10% average) 5% ACE -10% -15% Porto Seguro RSA Progressive Allstate CNA Financial QBE TrygVesta W R Berkley Liberty Mutual Insurance Australia State Farm Mutual Automobile Insurance 0% -5% SulAmerica Median: 13.3% PICC Property and Casualty Affirmative Insurance XL Capital -10% 0% -5% 5% 10% 15% 20% Premium Growth (3-year CAGR) Sources: Accenture Research based on ISIS, Bloomberg, company data Figure 5. Leading P&C insurers: premium growth and expense ratio (2006-2009) Median: 1.0% 80% 85% Chubb 90% P&C Combined 95% Ratio (3-year average) 100% XL Capital W R Berkley Progressive QBE RSA ACE SulAmerica Sampo Porto Seguro Insurance Australia Allstate Liberty Mutual Affirmative Insurance -10% -5% Median: 96.1% PICC Property and Casualty State Farm Mutual Automobile Insurance 105% 120% -15% Travelers TrygVesta 0% 5% 10% 15% 20% Premium Growth (3-year CAGR) Medians: premium growth includes all the peers, while Life expense ratio excludes CNA Financial. Sources: Accenture Research based on ISIS, Bloomberg, company data 5
  6. 6. 3. Operational excellence. Many high-performance insurers demonstrate operational mastery, with an operating platform that is simple, standardized and superbly integrated. They are highly automated and they measure everything. And they are never satisfied: they are continuously improving their systems and processes, and developing their workforces. At Metlife, for example, a consistent operating model, the convergence of processes, and continuous IT improvement are helping to deliver a targeted $400 million reduction in operational expenses. 4. Relentless pursuit of cost reduction. Another attribute of high-performance insurers is their unwavering commitment to minimize costs. This entails not only cost-cutting, but focusing on margin, on cost of service, and on changing the cost model, particularly switching from fixed to variable costs. It also means being open to all opportunities to reduce costs through sourcing models and offshoring. Progressive, for example, in 2009 reduced the combined ratio for its commercial auto line of business by 8.9 points. It achieved a ratio of 85.8 by, among other things, improving its handling of high-exposure claims and raising its operating efficiency. Metlife has optimized its cost structure and established a culture of high performance, enabling it to improve its auto and home expense ratio to 25.0 percent. 5. Focus on risk management. Most high-performance insurers take risk management very seriously. Their focus extends beyond underwriting risk to include investment exposure, control of financial flows, enterprise risk and the protection of customer privacy. 6 | The high-performance insurer of the future Figure 6. Leading multi-line insurers: profitable growth matrix (2006-2009) Median: 4.0% 40% Bradesco Seguros 30% 20% ROE (3-year 10% average) 0% -40% -50% -15% Mapfre Talanx Generali Ping An Insurance ZFS Groupama Bâloise-Holding Uniqa Assurant Vienna Insurance AXA Allianz Ergo Societa Cattolica Premafin Finanziaria Eureko Hartford Unipol Topdanmark Median: 9.7% AGEAS AIG -5% 0% 5% 10% 15% 20% Premium Growth (3-year CAGR) Sources: Accenture Research based on ISIS, Bloomberg, company data Figure 7. Leading multi-line insurers: premium growth and expense ratio (2006-2009) Median: 4.0% 80% 85% 90% P&C Combined Ratio (2006/ 95% 2009 average) 100% 115% 120% -5% Uniqa Topdanmark Ping An Insurance Vienna Insurance Allianz Ergo Eureko AXA Mapfre Median: 95.6% Bâloise-Holding Generali Talanx AIG ZFS Societa Cattolica Unipol Groupama Assurant 0% 5% 10% 15% 20% Premium Growth (3-year CAGR) Medians: premium growth includes all the peers, while P&C combined ratio excludes AGEAS, Bradesco Seguros, Hartford and Premafin Financiaria Sources: Accenture Research based on ISIS, Bloomberg, company data Although we find that high-performance insurers demonstrate all of these characteristics, our analysis shows that they generally excel in at least two. These spikes of excellence depend on the circumstances they face, their objectives and their strategies for achieving competitive advantage. The attributes identified above certainly help to explain high performance today, but the question is whether they will be sufficient to guarantee high performance in the future. Accenture strongly believes that high performance is by no means a stable state. The aim of this report is to develop a forward-looking perspective of high performance in the insurance industry. First we will paint a picture of the insurance landscape in the next five years by describing the forces and challenges which we believe will fundamentally shape the industry. Using this description of the future insurance landscape, we will then proceed to develop business models, operating models and capabilities which we believe will support high performance in the future.
  7. 7. Forces shaping the insurance industry The insurance landscape is constantly in flux and the forces shaping the industry in the next five years will differ from those that shaped it over the past few years. In our analysis, we identified a set of forces which we believe will challenge the current strategies of insurance carriers. Although these forces might not be completely new, what is new is their intensity and the speed at which they will take effect. These forces are: • Shifts in growth from mature to emerging markets. • Increases in the development and consumption of technology. • An escalation of both risk and regulation. • Changes in consumer behavior. • Changes in the competitive landscape. These forces will create a sea of challenges in which today’s high performers, and those that are aspiring to be high performers in the future, will need to navigate. 7
  8. 8. Shifts in growth The insurance industry has not been hit as badly by the financial crisis as the banking industry. The market capitalization of insurers has improved gradually since April 2009, and although the worldwide growth in premium volume is negative our research has shown double-digit growth rates in most emerging markets and recovering growth rates in mature markets. Figure 8. Evolution of market capitalization Total market capitalization of leading insurers* in US$ trillion Although the current performance of the industry indicates a recovery, we believe it will be very challenging to attain the level of performance that prevailed prior to the financial crisis. Previous research by Accenture2 looked into the global expansion strategies of leading international insurers, and found that BRIC and emerging Asian countries feature prominently in their growth aspirations. The insurance executives interviewed confirmed that these regions are the top target markets for global expansion of both their life and P&C operations. $0.5 It is our opinion that joining the gold rush in emerging economies which have shown high-growth potential will not be the only way for insurance carriers to achieve their profitable growth objectives. Our research has shown that there is also the need to address the untapped potential in established mature markets. An Accenture analysis estimates a premium growth potential between 2010 and 2015 of $400 billion to $600 billion in mature markets and $650 to $900 million in emerging markets. This estimate is based on a set of growth drivers which we believe are particularly relevant to the insurance industry: 8 | The high-performance insurer of the future $2.5 Highest point was October 2007 $2.0 $1.5 $1.0 $0.0 +61% Lowest point was February 2009 Jun07 Oct07 Feb08 Jun08 Oct08 Feb09 Jun09 Oct09 Feb10 Jun10 Note: market capitalization at month end; *global panel of 60 leading insurers Source: Accenture Research based on Bloomberg Figure 9. Key insurance markets 2009 insurance density in $ vs. 2009/2008 growth in percent, 2009 premium volume in $ billion 2009 Premium Volume = 500 $bn 30% Italy India 20% China* Brazil 2009/2008 Growth of 10% Premium Volume 0% (LC, %) Turkey Russia South Korea Spain Germany Sweden France US -10% Netherlands Japan Canada UK Worldwide Growth in USD = -3.7% Poland -20% $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 2009 Premiums per Capita ($) *China does not include Taiwan and Hong Kong Source: Accenture Research based on Swiss Re, Economic Research & Consulting, sigma No. 2/2010 $8,000
  9. 9. • Demographic changes (aging Figure 10. Projected growth of insurance populations and increased longevity in advanced economies). • New infrastructure investments driven by the shift towards a lowcarbon economy and increasing urbanization. • A burgeoning middle class in emerging markets. • Untapped potential in the low- income population segment in rural areas of emerging markets. Aging populations The world is growing older. This trend is particularly pronounced in advanced economies, where the United Nations3 estimates the median age will rise from 39.7 today to 45.6 by 2050. Not only will the population get older, but with these changes entirely new consumption and spending patterns will emerge. An Accenture analysis of these demographics in the United States found that, by 2030, spending by the age cohort between 65 and 74 years of age will increase by 85 percent while that of the 75-plus age group will almost double. Another aspect of the aging population is the increase in longevity. For example, the number of people aged 85 and above in the United Kingdom will double over the next 20 years. Despite improved medical care and living conditions, aging healthily will remain a huge challenge. The demand for community, residential and frail care will increase rapidly. This demand will further be fueled by an increase in the number of single households and of women joining the workforce. Household surveys show that women tend to assume the responsibility for care of the elderly. However, as women spend more time in the workplace the supply of informal care will be reduced. As care has generally, in the past, been provided on an informal basis, and has thus been unpaid, the private sector will need to step in to provide these services. CAGR 2009-2015 (based on USD) Total business World Industrialized countries Emerging markets 3.9% 2.2% 11.4% Life business World Industrialized countries Emerging markets 3.3% 1.6% 10.1% Non-life business World Industrialized countries Emerging markets 4.3% 2.5% 12.8% Sources: Swiss Re Sigma, BMI, Accenture estimates This trend offers huge potential for the insurance industry, as the demand for financial and pension products such as tailored equity release schemes and elderly-care packages is set to rise with the growth of these age segments. We believe that life, pension and health insurance in combination with assisted services such as home care will be the key segments which will benefit from these demographic trends. Accenture estimates that life and pension insurance business in mature markets will grow by $200 billion to $350 billion over the next five years, of which about $160 billion will be generated by the old-age provisioning segment. The expected rise in demand for health insurance globally represents some $120 billion of premiums. At the same time, the demand for new assistance services will grow in significance: worldwide coverage for automotive, travel, health and life care or other assistance services to insurance customers is estimated to increase by about $12 billion over the course of the next five years. This section would not be complete without mentioning the fact that certain emerging markets also show a strong aging trend, especially China. However, we do not believe this to be as strong a source of growth as in mature markets owing to the fact that consumers in these sectors in emerging markets do not have the same buying power. New infrastructure investments The quest for sustainability and the shift to a low-carbon economy will be a dominant trend in the next decade. The pressure for change will be exerted by rising commodity prices, concerns about energy efficiency, and natural disasters and freak weather. The industrial shift towards a low-carbon future will necessitate dramatic shifts in the underlying infrastructure of economies. Buildings, transport networks, energy sources, power generation and industry will all need to be updated and/or replaced. To avoid significant climate change by curbing carbon emissions, the International Energy Agency (IEA)4 estimates another $500 billion will need to be invested annually in addition to the extra investment of $10,500 billion needed from 2010 to 2030 to improve energy efficiency and boost low-carbon renewable energy, among other initiatives. Worldwide cumulative investments in renewables 9
  10. 10. will add up to $1,707 billion by 2020 according to the IEA estimate. Industry analysts estimate that the number of hydro-electric plants planned for the next years exceeds 2,000 worldwide. Figure 11. Urbanization is on the rise Number of cities with more than 1 million people and population (million) Population Cities 1,500 500 Number of cities (RHS) 400 Investment on this scale cannot go uninsured and will thus open up a new growth area for insurers. However, reliable data indicating the frequency and severity of potential claims is not yet available for some of the new risks. For example, the susceptibility of trans-regional renewable energy networks to damage or failure is uncertain and needs to be explored over time. Proper assessment and pricing of risks related to new investments will therefore require a new skill set. Insurers will need to expand and refine their capabilities in gathering and integrating a greater amount of different risk information. Quickly transferring and leveraging insights gained through new underwriting and risk experience will become more important. Enhanced usage of more sophisticated, IT-supported predictive modeling may help insurers to expand and refine their traditional approach to risk assessment and pricing. Increasing urbanization has become a major social, economic and political issue in emerging countries. According to the United Nations3 the total urban population of the developing world will more than double between now and 2050, increasing from 2.3 billion in 2005 to 5.3 billion. Furthermore, the size of cities in emerging markets is growing by the day. The number of cities with more than 1 million inhabitants is set to rise from 300 in 2005 to 479 in 2025, and the number of people inhabiting these cities will rise from 863 million to almost 1.5 billion. The rapid influx of new inhabitants is placing a strain on basic services such as public transport, roads, electricity and water, creating a pressing demand for investments in infrastructure. This new infrastructure will in turn need to be insured. 10 | The high-performance insurer of the future 1,000 Population 300 200 500 100 0 1950 1960 1970 1980 1990 2000 2010 0 2020 Source: Accenture: New Waves of Growth in the Developed World (United Nations) Global urban population (billion) 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 Emerging markets Developed markets 0 1 2 3 4 5 Source: Accenture: New Waves of Growth in the Developed World (United Nations) 6
  11. 11. Rising middle class Rapid growth is fuelling rising employment and incomes in emerging economies, creating a burgeoning group of potential consumers. The global middle class is expected to grow from 1.7 billion to 3.6 billion between 2010 and 2030. China is now the world’s biggest car market. Indian retail sales are expected to record annual average growth of 5 percent a year for the next five years, compared with less than 1 percent in Western Europe. This trend provides a host of new opportunities for the insurance industry. Although much of the demand generated by this growing middle class will be for low-cost products, this is likely to change as incomes rise and the demand for more sophisticated products grows. Throughout this growth trajectory there will be an increasing demand for insurance products, especially health, motor insurance and small property insurance. These may seem to be familiar product categories, but insurers must keep in mind that the new middle class is totally different from traditional customers in the mature economies. Not only are the volumes smaller but channel preferences and buyer values are also vastly different. One of the key buyer values is brand consciousness and affinity. Insurers should use this knowledge either to build a strong brand or team with a strong brand to create traction in these markets. Low-income communities, especially in rural areas The poorest people in the world are most in need of the security that insurance brings. They have little access to health services and they are most likely to live in areas which are prone to floods or natural disasters, a situation aggravated by climate change. Inhabitants of certain areas of Jakarta are being offered flood insurance in the form of a card which is valid for one year, an innovative product that was developed and launched by GTZ, a German development organization, Munich Re and Asuransi Wahana Tata, a local insurer and risk carrier. The growth of the Chinese and Indian economies in the 1990s has lifted 400 million people out of extreme poverty. The rural multiplier effect is what excites policy makers and business leaders alike. For every new opportunity for a villager to use his mobile phone to protect his crops, there is a knock-on opportunity for him to purchase a small refrigerator or a motorcycle. Spotlight: Islamic insurance The last decade has seen Islamic insurance products and services to the middle classes rise in significance, mostly in emerging markets. Muslim consumers remained conscious of the fact that conventional insurance is not acceptable in Islamic law. As pointed out by Swiss Re5 recently, roughly 1.5 billion Muslims around the globe are underserved by insurers. The market potential seems huge, keeping in mind that Muslim countries account for about one fourth of the emerging markets’ GDP. Takaful is an answer to growing demand for insurance-like coverage for retail customers in Muslim markets. It developed as a Sharia-compliant system of risk sharing and has been practiced for centuries. It is similar to mutual insurance concepts, exists in various models and is nowadays increasingly demanded by Muslim customers. The supervisory authorities of the relatively small but fast-growing United Arab Emirates recently announced specific regulations to increase transparency in the fragmented and competitive takaful market. This may result in consolidation and strengthening of the local market and support the UAE in its ambition to become the capital of Islamic finance. Swiss Re estimates a $1.7 billion premium volume already written in 2007 under takaful schemes worldwide, showing an impressive growth rate of 25 percent over the course of three years. Malaysia—which too has become a leading international player in Islamic finance— Indonesia and Saudi Arabia are the markets with the biggest potential for Shariacompliant insurance services. Despite the global financial and macroeconomic crisis, Swiss Re estimates that takaful will grow at 17 percent per year (inflation-adjusted). Global takaful markets therefore could reach up to $7 billion by 2015, with the Middle East, northern Africa and some eastern Asian markets showing the highest potential. Source: Swiss Re, press, Accenture Research Spotlight: Insurance in rural India One of the emerging economies with a significant rural portion of the population is India. There is no question that India’s rural markets are becoming a powerful economic engine. The rural market in India contributes more than half of the sale of fast-moving consumer goods, clothes and durables, 100 percent of agri-product sales and nearly 40 percent of automobile sales.. In the last few years, the biggest growth in the Indian mobile telephony market has come from the hinterland where 175 million connections have been sold. This number is expected to rise to 440 million by 2012. Half of all life insurance policies are also sold in India’s rural villages. Max New York Life, one of the top 10 Indian life insurers, refocused its business model to tackle the new growth opportunity represented by the growing rural market. However, the company learnt that this growing niche market has its own specific requirements. For example, rural customers expect products and policies to be fairly simple. Also, products need to be flexible enough to allow customers to withdraw their money in an emergency with little or no penalty. Developing sales channels that are close to customers is critical, but challenges remain when cooperating with third-party organizations like nongovernmental organizations. The case of Max New York Life shows that tapping the huge potential of an underserved market means more than just tweaking or transplanting urban products to the rural areas. Source: Accenture analysis 11
  12. 12. There is a growing realization that global investment and growth will increasingly come from rural populations, as their savings translate into consumption. Figure 12. Sweet spots in mature markets Attractiveness of selected mature geographies (preliminary results) Germany A&H Attractive growth markets and segments Based on these identified growth areas, Accenture performed an indepth analysis to determine the size of the opportunity for the various insurance segments in mature and emerging markets. Accenture believes that attractive growth opportunities in the emerging markets are widely spread across global regions. These emerging markets are of varying sizes and levels of development, and offer opportunities to local and global insurers. Among the most promising of these markets one finds the “usual suspects” like China and Brazil, which are already closely monitored by international players. The sheer scale of their populations and economic growth rates will continue to make these markets attractive over the course of the next few years. However, legal constraints will make it difficult for foreign players to seize growth opportunities quickly in markets like China and India—a situation that is not expected to change soon. Among the more buoyant markets, the growth potential of Russia and Turkey remains to be discovered. Taking Russia as an example, the non-life segment (and especially the health insurance segment) is rapidly growing, fragmented and open to the participation of foreign players. On a slightly lower level, fairly mature South African and South Korean insurance markets still show sizable growth opportunities. However their overall attractiveness might be reduced given their established market structure and dominant local players— all barriers to entry for foreign players. 12 | The high-performance insurer of the future High projected growth France A&H Spain Life Spain P&C UK A&H US P&C UK Life UK P&C US A&H Netherlands A&H US Life Germany Life Italy Life France Life France P&C Low projected growth Italy P&C Germany P&C Low attractiveness High attractiveness Bubble size indicates premium volume in 2009. “Attractiveness index” based on market concentration. Positioning of markets on the graph is relative to peer markets. Source: Accenture Research (based on Swiss Re Sigma, BMI, Accenture estimates) Spotlight: United Kingdom High volumes of switching, fueled by the commission-based independent financial advisor model, have historically lead to an overstatement of the UK life market, with the impact of new regulation in the form of the RDR (Retail Distribution Review) expected to reduce new business churn. While recent economic conditions have led to declines (new business volumes fell by 19.5 percent in 2009), a return to growth is expected at 4.5 percent compound annual growth rate up to 2015, but will remain unpredictable as the impact of the RDR is not clear. Opportunities exist for providers in the new regulatory environment to take advantage of distribution channels such as bancassurance and the possibility of tie-ups between providers and distributors. The launch of NEST (National Employment Savings Trust, a pension scheme being introduced by the government) from October 2012 could also lead to an influx of new investment into the market and thus improve growth prospects beyond 2012. NEST will require all UK employers to enrol employees automatically into a “qualifying pension scheme” which could be either an existing scheme or NEST. A move back to in-house asset management could also be a way for insurers to grow their share of this market. A history of diversification has produced complex financial conglomerates in the UK life sector, and consolidation is expected to be a major driver of change. The mature UK property and casualty market remains very competitive, especially in the retail sector where the continued growth of aggregator websites is adding competitive pressures and changing the dynamics of the industry. The market is showing clear signs of saturation, requiring insurers to innovate for growth. However, more-demanding consumers and increasing pressure on price (driven by escalating fraud and bodily injury costs) are making it difficult to do so in certain sectors such as personal and motor insurance. Opportunities exist for insurers leveraging new distribution models, such as aggregators, sophisticated pricing and cost control to take advantage of M&A opportunities as the market returns to growth from 2011. Consolidation in the market is expected as major insurers such as RSA and Allianz have announced their ambitions to grow market share in the UK property and casualty market. Source: Accenture Research
  13. 13. With regard to mature markets, Accenture believes that attractive business opportunities are spread across different countries and segments, with life and some health insurance businesses typically showing higher-growth prospects. The enormous US insurance market, which is built on the world’s largest consumer market and commercial and industrial business volume, remains an attractive growth proposition going forward. Stronger growth in the gross domestic product will enhance the US market’s attractiveness, while recent US legislation may also support the insurance sector’s prospects. Though the impact of healthcare reform remains to be seen, insurance companies could significantly benefit under some scenarios. National investment in physical infrastructure and the growth of biotech and alternative energy businesses may play a role in the relatively strong growth forecast for the US property and casualty market. Although the accident and health business segment shows strong growth rates in general, future opportunities need to be carefully considered by insurers given specific local frameworks and market conditions. In many mature markets, private insurers play a role within the social security network (for example, health insurance coverage in the Netherlands and Germany). The overall accessibility and attractiveness of the market segment may be impacted as a consequence. Smaller markets like Spain will also produce attractive business opportunities for foreign insurers as they return to growth and undergo a phase of consolidation and market restructuring. Spotlight: Spain Spanish insurers were strongly affected by the macro-economic turmoil and are facing pressure on profitability through increasing competition, reduced growth and an increase in claims. A modest two percent increase in total business is expected for 2010. From a medium- to long-term perspective, the fact that Spain is the world’s 10th biggest economy means that it will continue to offer significant potential for growth. The Spanish market is attractive to foreign players, given that the insurance market is fragmented (the top five players have only 27 percent of the market) and its robust historical premium growth (more than seven percent in savings-type life and in non-life products). Other opportunities could be generated by the need for local banks to sell off their life businesses in response to Solvency II, as well as the restructuring of the savings bank and mutual bank sectors. The growth potential of the Spanish insurance market ($86 billion premium volume) is reflected in its low insurance penetration rate (5.5 percent compared with the 8.6 percent average for Western Europe) and a low premium per capita level of $1,092 (as compared with the average of $2,922 for Western Europe). The market shows sustained high profit levels: for example, the average combined ratio over the last few years is about 90 percent. Although Spanish insurers utilize all distribution channels, low-cost channels are still under-used (only 0.5 percent of premium income is generated via the Internet). In the life sector, which represents about 50 percent of total market premium volume, products are mostly sold through very dense banking branch networks (73 percent of new sales). Savings products from banks provide strong competition for insurers, while health products and services are covered by the social security network. Source: Accenture Research Figure 13. High-potential emerging markets Attractiveness of selected emerging markets (preliminary results) Turkey India High projected growth Thailand Russia Brazil China South Korea South Africa Low projected growth Low attractiveness High attractiveness Bubble size indicates premium volume as of 2009. “Attractiveness index” based on weighted parameters that indicate, e.g. competition level, burden of financial regulation, or ease of doing business in the market. Positioning of markets on the graph is relative to peer markets. Source: Accenture Research (based on Swiss Re Sigma, BMI, own estimates) 13
  14. 14. Spotlight: Russia By most standards, the Russian non-life segment is large ($30 billion in 2009) and rapidly growing. The increase in consumer wealth in the 2000s coupled with Russians’ adoption of a consumer lifestyle is driving demand for car and property insurance. Infrastructure insurance is also a growing segment as new assets are built to enhance the security of the country. On the other hand, demand for life insurance is very low (density of $4 per capita) because ordinary Russians are focused on shortterm needs. Also, life insurance is usually influenced by government regulation but the Russian government is inactive in this area. The lack of support for the aged and those injured in accidents will have to be addressed, but the life insurance business is an opportunity only in the long run. Two macro factors influencing the insurance business are the low life expectancy of Russians and the economy’s dependence on oil and gas, whose prices are volatile. The Russian insurance market is open to participation by foreign firms. Although there are over 700 insurance companies in Russia, the market is consolidating and already the top 10 companies account for 40 percent of the market. Source: Accenture Research Spotlight: India Since the insurance sector was liberalized in 2000, India’s insurance industry has grown almost six-fold. Growth accelerated with the entry of private players who aggressively spent on marketing and educating customers. Favorable demographics, increasing per-capita income and rising awareness will drive future growth. There is still huge potential to increase life cover (most Indians are grossly underinsured), non-life penetration is still only 0.6 percent of gross domestic product, and sectors such as pensions and health insurance will see faster growth owing to a lack of social security and facilitating regulations from the IRDA (Insurance Regulatory & Development Authority). 14 | The high-performance insurer of the future Over the next five years, the Indian insurance market is expected to continue growing at a double-digit rate, and eventually become the fourth-largest insurance market (by total premiums) in Asia. However, the market is highly concentrated (the top five players control over 80 percent of the market) and competitive, while customers are spread out across the country. As a result, doing business has been challenging for foreign companies. Source: Accenture Research
  15. 15. Spotlight: China In tandem with robust economic growth, China’s insurance market has shown a compound annual growth rate of 26 percent between 1990 and 2009.The life insurance business has been growing fastest and accounted for 67.6 percent of total premiums in 2010. Recently, Chinese insurance companies have embarked on transforming their product mixes, focusing their sales efforts on risk products, especially individual life policies, while reducing the emphasis on universal life and investment-linked products. The trend is likely to continue as companies pursue quality growth by selling profitable risktype products, and while regulators promote such changes. Bancassurance has grown significantly and become the key sales channel for insurance. Despite its impressive growth record, China’s insurance industry is still in the early stages of development, with life insurance depth and density merely 2.2 percent of GDP and $74 per capital respectively in 2009. The growth drivers for China’s insurance market will remain strong in the medium term thanks to a number of factors: increasing household income, the dearth of attractive long-term saving vehicles, a large population which is aging fast, an increasing rate of urbanization and the emphasis on insurance in recent pension reforms. The focus of life insurance will gradually shift from death to annuity. Since China became a member of the World Trade Organization in 2001, its insurance industry has opened up at a faster pace than both banking and brokerage industries. Since 2003 wholly foreign-owned subsidiaries of life insurers have been permitted with no limitation on business models, and all geographic limitations have been eliminated. As a consequence, foreign insurers now account for more than half of all insurance companies in China—although they account for less than 5 percent of the market. China’s insurance market is still dominated by the three largest domestic life insurers, and state-owned insurers still maintain a strong position in China, partly due to their ownership of established distribution networks and large customer and claims databases. Source: Accenture Research 15
  16. 16. Consumerization of IT In the past couple of years we have witnessed unparalleled developments on the technology front. In different ways, these have transformed the insurance business—and continue to do so. Investments in IT will be either important or critical for insurers, as stated by the vast majority of insurance equity analysts in a global Accenture survey6. Reponses showed that analysts see the need for insurers to invest in two vital operational aspects: their operating efficiency and the impact of aging IT systems. While the use of IT to improve efficiency will always be critical, investment in IT innovation will also play an essential role for insurers to stay ahead of market trends. We have moved beyond merely creating and communicating through computers to actively sharing and collaborating on a real-time basis through mobile computer devices. Consumers are now driving technology innovation by demanding more speed, access and collaboration. Based on Moore’s law, one could predict that in the next five years we will witness a proliferation of smaller computing devices, faster processing speeds and lower prices. In addition, we believe that the convergence of information, technology and humans will also have a huge impact on the sort of devices that are produced, and how they are used. The insurance industry tends to lag behind the leaders in this area. Based on our experience with clients in the insurance industry we believe that the slow adoption rate has been due to: • Inflexible legacy technology. • Complex business models and 1. Going mobile processes. • A mindset focused on operations • IT budgets that are dominated by non-discretionary spend: analysts estimate that insurers spend only 20 percent of their IT budgets on innovation. Spotlight: Amazon.com—using IT to sell more for less Amazon.com was launched to take advantage of critical efficiencies and major structural cost differences which the Internet offered. Internet technology gave Amazon the scale, confidence and customer insight (through a powerful analytic capability) to expand from books into an ever-increasing number of categories, producing a 29 percent average rate of compound growth in revenue over the last five years (compared to Wal-Mart’s eight percent). Amazon.com’s operating costs (all operating expenses excluding the cost of goods sold) are currently running at 18 percent of revenue. This ratio is better than its retail peers: analysis suggests that other US booksellers have operating expenses of at least 27 percent of revenue—and probably higher. Source: Accenture Research Figure 14. Mobile is on the rise in emerging countries Number of mobile cellular subscriptions (billion) 1999 36% 64% Emerging markets Developed markets 2000 41% 59% 2001 47% 53% 53% 2003 47% 57% 2004 43% 62% 2005 38% 67% 33% 2006 71% 29% 2007 74% 26% 2008 77% 0.0 0.5 1.0 1.5 Source: International Telecommunication Union 16 | The high-performance insurer of the future The proliferation of mobile and wireless technologies is a trend that cannot be ignored by insurance carriers. There are two aspects to this trend which we believe are particularly relevant to insurers. The first is the staggering growth in mobile Internet use. The rather than innovation. 2002 Pure-play consumer Internet companies have reduced their cost of sales dramatically and raised user expectations relating to experience, collaboration, mobile access and real-time responsiveness. By contrast, most corporations and public-sector organizations have fallen behind. One of the most fundamental challenges insurers are facing today is to remain relevant to a consumer base that is changing rapidly and fundamentally. We believe that insurers must take account of three technology trends in order to sell more profitably. 2.0 2.5 3.0 23% 3.5 4.0
  17. 17. second is the growth and proliferation of mobile devices embedded with semiconductor chips with the potential to transmit various types of information. Mobile phones have become ubiquitous across the globe. Driven by the development of wireless technology as well as the introduction of ultralow-cost handsets breaking down barriers to entry, the growth of mobile phone subscriptions in emerging economies is staggering. Of the approximately 4 billion worldwide mobile phone subscribers, 77 percent come from emerging countries. Mobile Internet is one of the key applications used on mobile devices. According to Forrester Research7, mobile Internet adoption will continue to grow significantly, with users tripling from 13 percent of Western European mobile users in 2008 to 39 percent in 2014. This is a tremendous opportunity for insurance carriers as customers have, through the purchase of a mobile phone, invested in an additional sales channel. Carriers are now challenged to transfer current capabilities to mobile devices and actively push information and services onto these devices. For the foreseeable future, digital and mobile channels will provide the most flexible, efficient and scalable means to acquire, service and retain customers—and grow customer share. Especially in emerging economies, the mobile channel will be essential and fundamental to low-cost distribution. Spotlight on insurance technology innovations: CUBISM Accenture’s solution, called Coaching UsageBased Insurance Service Model (CUBISM), enables real-time, seamless analysis of a customer’s driving behavior to make his or her risk transparent and allow for individual premium discounts. In addition, value-added services like real-time driver coaching, vehicle theft tracking, a driver logbook or a mobile assistant in emergency situations will provide additional benefits to the customer and help insurers to market a unique offering. Using CUBISM, insurers can increase their profits through improved risk selection and pricing and lower loss ratios, while growing their revenues through improved customer loyalty and market differentiation. Source: Accenture Research This type of technology opens up a host of opportunities for insurers to enhance underwriting, sales and service. Innovative insurance companies are also starting to use location-based data to optimize risk selection and premium calculation for motor insurance. Using this technology, the insurer can monitor and analyze driving behavior in real time while the customer’s privacy remains protected. Actual driving metrics will be used to discount individual premiums. devices can also improve sales force effectiveness by providing real-time data to agents in customer-facing situations. Open mobile applications allow independent agents to become productive more rapidly. 2. Digital marketing Mobile devices also give customers an additional way to interact with carriers for assistance following loss/accidents, and to give first notice of loss. These services could be enhanced by using location-based technology to improve service by increasing accuracy and speed. Internet penetration is high, and consumers are readily adopting new media channels while traditional media are having less impact. Digital marketing has now come of age. It encompasses established methods of digital communication with the customer, such as e-mails, as well as videostream advertisements and established social interaction tools such as blogs and social networks. Customers can also use their mobile devices to share lifestyle data, thus enabling adaptive pricing and bettertailored business models. Mobile The key driver behind digital marketing is networking and communication through social media. Social media have passed the experimentation stage Figure 15. Adoption of social media Increase in adoption of social media activities via PCs, 2007 and 2009 Percentage of respondents The ability of mobile devices to support location-based services, whereby a customer’s location can be tracked on a real-time basis, is one of the most recent technological developments. Forecasting a compound annual growth rate of 12 percent, the Berg Institute8 expects revenues from location-based services to rise from 2009’s total of $270 million to more than $500 million in 2015. 53 52 2007 2009 40 38 37 32 24 28 23 31 21 6 Social Networks IM Chat Rooms Video Sharing Photo Sharing Blogs Source: Gartner: User Survey Analysis: Social Media Adoption Trends, June 2010 17
  18. 18. Insurers still have to catch up with their customers in the digital world. Established digital media such as e-mails attract approximately 40 percent of marketing spend, followed by paid keyword searches. Online games and social networks attract roughly 14 percent of the budget, with blogs, podcasts, and wikis trailing in the single digits. Figure 16. Consumers are connected via social networks Global number of active users, 2009 (million) Facebook 350 MySpace 260 LinkedIn 55 Twitter 50 Source: Accenture: New waves of growth in the developed world (Gartner, Linkedln) Figure 17. Traditional marketing methods are losing ground For insurers, digital channels can play an important role in various areas of marketing. For example, building a strong brand can be supported online by carefully-managed involvement in various kinds of social media, while user-generated content can be steered gently instead of leaving it to spiral out of control. Social media can also be used to reach clients more easily, and the selling process can be facilitated by offering an option to purchase online. “In the next three years, do you think marketing’s effectiveness will increase, stay the same, or decrease for each of the following?” Interactive marketing tactics Created social media Online video Search engine optimization (SEO) Mobile marketing Paid placement in social media Email marketing Paid search listings Online classifieds or directory listings Display ads through ad networks Display ads through publishers Traditional marketing tactics Direct mail Television Magazines Outdoor Telemarketing Radio Newspapers Yellow pages 0% 20% Increase 40% Stay the same 60% Decrease 80% 100% Not applicable Base: 204 marketers Source: March 2009 US Interactive Marketing Forecast Online Survey and are now a significant communications phenomenon. The usage of social media has doubled from 2007 to 2009, while the popularity of smartphones is now driving their move onto mobile devices. The virtual world inhabited by an increasing number of customers is extremely complex, and digital marketing will be needed to reach them. More than any other industry, insurance built its market through networking and reputation. As a result, the potential value of social media to insurers should be quite extraordinary. On the other hand, social media are still maturing, and the risks to insurers are more significant than they are to many other 18 | The high-performance insurer of the future industries. Nonetheless, insurers have an unprecedented opportunity to interact with consumers in the digital world. Consumers will continue to move freely in the digital world and express their opinions publicly. Therefore, insurers have lost control of the content that describes their brand: much of this content is generated by customers, employees and even members of the general digital public, who may not even have had any touch points with the insurer. Traditional brand management is no longer possible: the user-generated input outweighs the company’s branding efforts and may even reverse them, if not managed carefully. In addition, involvement in the digital world gives insurers the opportunity to gain a deeper understanding of their customers and gather important market, product and customer information through access to click rates, browsing histories and so on. The fact of the matter is that customers will turn increasingly to digital tools for information, making each step of the consumer buying process susceptible to the influence of a variety of marketing tools. 3. Analytics Ubiquitous computing and technology capabilities, paired with the social media consumer patterns as described above, have dramatically increased the volume of data at companies’ disposal. According to research house IDC9, the digital universe grew by 62 percent to nearly 800,000 petabytes in the last year. The estimate for 2010 is 1.2 million petabytes. This explosive growth means that by 2020, our digital universe will be 44 times as big as it was last
  19. 19. year. High-performance businesses will be distinguished by their ability to create sense of the digital-information tsunami which is set to swamp us. Deriving insights from this data will be a key source of commercial insight and thus of competitive advantage. But these insights are reliant on better ways of accessing, organizing and interpreting information. Insurers need more than deep functional insights—they also must develop a cross-functional view to enhance their ability to predict behaviors and consequences. Driven by globalization and greater business complexity, analytics is moving up the sophistication curve. It has now become much more useful because it generates actionable insights rather than simply insight. Crucially, the tools to process the huge amounts of data and analyze it are now commercially available and are integrated into the latest enterprise resource planning, financial and customer relationship software. Companies across all industries and geographies are investing in business intelligence. The global business intelligence software market is estimated to grow by eight percent annually until 2014. Better analytical capabilities to segment demand, coupled with improved marketing techniques, will be critical to unleashing growth. Insurers can benefit from analytics across major parts of the value chain. Spotlight: Analytics helps large US P&C insurer to achieve high performance This insurer wanted to change the way it collected and managed data, and to optimize its business applications to become a more information-driven organization and push business-improvement initiatives. To achieve its business intelligence vision, it teamed up with Accenture. Among other initiatives, and with the assistance of SAS, Accenture defined the strategy for the use of highend, grid-based analytic tools. SAS and Accenture built an analytics center of excellence within the company using SAS Enterprise Miner, SAS Business Intelligence and SAS Grid Manager, to promote collaboration and easy growth for the insurer’s reporting and data mining needs. This allowed the company to manage and prioritize analytics and reporting in areas such as claims management, fraud detection and risk management. In terms of marketing and sales, analytics can be used to develop new segmentation approaches that are much more granular than is possible today. In conjunction with additional analyses, this segmentation can be used to create tailored campaigns and detailed profiling. Analytics will also play a very important role in churn reduction, one of the key challenges facing insurers in mature markets. Insurance carriers already use analytics throughout the claims process for fraud detection or predictive modeling. We believe this practice will quickly become widespread in the industry because of the enormous savings it can generate. Analytics can be used extensively in customer and behavioral profiling, information that can be used to make product pricing and individual underwriting more accurate. In the future, analytics will be used to analyze price elasticity and apply consumergoods-pricing techniques to the insurance industry. Sources: Accenture, SAS We firmly believe that the consumerization of technology will be gamechanging for the insurance industry. The opportunities to create value in key insurance functions are far too big to be ignored, and consumers will increasingly demand that insurers use modern technology to provide them with tailored, personalized products and services. Those insurers that have mastered and deployed these new technologies will be the winners in the next five years. 19
  20. 20. Increase in risk and regulation Observing the other forces shaping the industry, we believe that apart from financial risk there will be six risks which the high-performance insurer must take particular care in negotiating over the next three to five years. These are: • Increased frequency of catastrophic events. • Risks inherent in the lucrative emerging middle classes. Figure 18. Insured catastrophe losses are unpredictable Insured catastrophe losses 1970-2009 in USD billion, indexed to 2009 140 120 110 Northridge earthquake 50 Hurricane Andrew 40 Hurricane Katrina et al Hurricanes Ivan, Charley, et al Attack on World Trade Hurricane Center Ike, Gustav Winter storm Lothar 30 • Demographic shifts in core markets— 20 particularly the risk posed by the aging of workforces. 10 0 • Uncontrollable social media attacks. 1. Increased frequency of catastrophic events The increasing number of catastrophic events means that insurers are having to foot an increasingly large bill for claims. Natural catastrophes and man-made disasters cost society approximately $62 billion in 2009; the number of such events has increased since the 1970s. We believe that the incidence of catastrophic events will rise even further, posing a great risk to insurers in the next five years. Dealing with this risk requires specific skills from insurers. The attraction and retention of experts in this field, as well as the development of predictive models, are key requirements. Only a few insurers with a substantial capital base will be able to underwrite these risks profitably. 20 | The high-performance insurer of the future 1975 Earthquake/tsunami • Increase in regulatory intervention. • Increase in cyber crime. 1970 1980 1985 1990 Man-made disasters 1995 2000 2005 Weather-related natural catastrophies Source: Swiss Re, Sigma No 1/2010. Natural catastrophes and man-made disasters in 2009 Figure 19. Number of catastrophic events (natural and man-made disasters) increased since 1970s Number of events 1970-2009 300 250 200 150 100 50 0 1970 1975 Man-made disasters 1980 1985 1990 1995 Natural catastrophes Source: Swiss Re, Sigma No 1/2010. Natural catastrophes and man-made disasters in 2009 2000 2005
  21. 21. 2. Risk inherent in the lucrative emerging middle classes As the race to capture the growth potential of the emerging middle class gets going, insurers put themselves at risk by applying the underwriting criteria of their existing mature markets to this new market. The realities of the local market cannot be ignored. The middle classes in emerging economies will only be lucrative for those insurers that understand how they differ fundamentally from the middle class in mature economies. According to a report by the World Health Organization (WHO)10 on road accidents, compiled in 2010, lowincome and middle-income countries have higher road traffic fatality rates (21.5 and 19.5 per 100,000 population, respectively) than high-income countries (10.3 per 100,000). Over 90 percent of the world’s road fatalities occur in low-income and middle-income countries, which have only 48 percent of the world’s registered vehicles. For example, road traffic injuries have now become one of the top 10 causes of death and disability among Russians. The number of people diagnosed with diabetes worldwide is drastically increasing, supposedly linked to lifestyle changes that drive obesity rates. According to the WHO11, the number of diabetics worldwide will have risen to 333 million by 2025; 80 percent of them will live in low- and mediumincome countries. Increased affluence appears to play a key role in this growth: in industrializing countries, research indicates a correlation between diabetes rates and socio-economic groups. For example, India is expected to have the largest population of diabetics by 2030—80 million people—with the highest prevalence among the affluent urban socio-economic sector. Spotlight: US demographic trends and their impact on insurance employers A “talent time bomb” is evident in the United States. The gap between the number of American retirement-age workers (55to 64-year-olds) and entry-level workers (20- to 24-year-olds) is rapidly widening. Starting from a baseline of 390,000 workers in 1980, the gap is expected to expand to nearly 22 million by 2020. The insurance industry will simply be unable to fill professional roles in key areas like claims management at previous rates for two mutually reinforcing reasons: experienced workers are leaving much faster than they can be replaced, and comparatively unattractive entry-level salaries will make it difficult to attract new talent to the organization. Increased adoption of consumerist, credit-fueled lifestyles also increases the risk profile of the middle class in emerging economies. Once famed for their frugality, with saving rates of around 40 percent, the Chinese have now become profligate. The use of credit cards is growing rapidly, in line with the country’s economic growth, higher income levels and burgeoning middle-class population. In 2008, China had 104.73 million credit cards in circulation, a 92.9 percent increase on the previous year. Saving rates among the urban Chinese young are now effectively zero. 59. By 2030, 28 percent of Germany’s population, and 20 percent of those in the United States, will be older than 65, and 19 million people in the United Kingdom will be over 60. Insurers operating in emerging markets will need to develop a strong local view on risk in order to identify and understand these emerging risks and to develop prediction and prevention methods rapidly. 4. Uncontrollable social media attacks 3. Demographic shifts in core markets The workforce in many countries is aging, and some industry sectors and geographies will begin to feel the impact of this aging in as little as five to 10 years. Even more critically, this is not a short-term problem. In fact, the population of developed countries is expected to continue getting older over the next several decades. By 2040, Italy, Japan and Spain will have as many people aged 60 or more as people between the ages of 15 and Source: Accenture, Rethinking claims, 2008 This risk is currently being significantly underestimated by global insurers. Most carriers in mature markets have an above-average-age workforce and will lose a lot of experience and know how, currently “embedded in the brains” of personnel who will retire over the next five to 10 years. They will have to find ways to transfer this knowledge into the organization. Social media are a double-edged sword for the insurance industry because of its reliance on networking and reputation. Insurers have so far been quite hesitant to venture into social media. On the one hand, social media such as Facebook, Twitter and Foursquare offer a “free” way to market, advertise and promote the brand to customers online. On the other, social media can also provide the vehicle for devastating attacks on an insurer’s reputation and brands. Social media have become a powerful and disruptive force that threatens insurers’ ability to control and develop their brand among both customers and employers. Insurers do not own or run 21
  22. 22. the platforms and technology that may be used to launch online attacks from unsatisfied customers, or consumers in general. However, it seems insurers have no choice: already customers are using social media extensively to talk about insurance. Approximately 1,000 entries on insurance are being posted every hour. Google’s insurance blog has received more than 300 million entries. Accenture believes that insurers cannot avoid this risk; they have to manage it. This means insurers need to monitor online conversations with customers and prospects actively. They need to be present in social media forums, expressing their point of view, and build up discussion forums themselves. To avoid (or to better deal with) social media attacks, insurers will need to strategically rethink their approach towards social media and implement appropriate measures. Key elements insurers need to address include creating an overall social media policy and building an ongoing monitoring capability to track social media content that is relevant and impactful to their business. 5. Increased regulatory intervention In the aftermath of the global financial crisis, governments and their regulatory authorities have recognized the importance of a healthy insurance industry as a key pillar of a healthy economy. Regulation is here to stay and governmental enforcement will increase. We identified three types of regulations which we believe will be relevant to carriers, especially for those choosing to operate in emerging economies. Financial regulation The Solvency II Directive attempts to provide the basis for a solid insurance industry in Europe. This groundbreaking revision of insurance law presents European Union insurers with challenges both quantitative and qualitative— 22 | The high-performance insurer of the future from calculating minor technical provisions to developing sweeping new transparency capabilities. Solvency II will add to the pressures on existing risk management capabilities. Still, insurers expect Solvency II to have a positive impact on the market for those who look beyond compliance, and compete on the enhanced pricing and underwriting capabilities it enables. In the Accenture survey on Solvency II market readiness12, a full 75 percent of the large European insurers surveyed saw a positive business case in complying with Solvency II. These forwardthinking companies see the benefits of integrating risk management into their overall strategic framework. The impact of this thinking will be felt throughout the global insurance industry as overseas subsidiaries of European insurers fall into line with their parent companies. Market-entry regulation Market-entry regulations could be a serious barrier to entry, especially for those insurance carriers looking for growth in new markets. Regulations range from imposed caps on foreign direct investment, set tariffs and conditions, re-insurance monopolies and restrictions on investments to low-return state and central government bonds. Next to more operational hurdles such as the lack of a local sales franchise or IT infrastructure, strict regulations potentially thwart the market-entry ambitions of foreign insurers. For example, Indian regulators still require foreign insurers to contract joint ventures with local firms, foreign direct investment being capped at a 26 percent stake in the joint venture. A proposal to increase the foreign partner’s stake to 49 percent has been pending for some time, with no immediate sign of a decision. In China the insurance sector is still restricted. Life insurance joint ventures cap foreign ownership at 50 percent. Non-life joint ventures are initially limited to 51 percent foreign ownership, although this falls away after two years, following which there are no restrictions on ownership. Understanding the specifics of local market-entry regulations will be crucial to those insurers that are intending to expand into emerging economies. Consumer protection regulation Each year the global economy adds millions of new consumers of financial services. Most are in developing countries, where consumer protection and financial literacy are still in their infancy. Protecting the interests of consumers has become an important component of sound and competitive financial markets, particularly in those countries that have moved from state planning to market economies. Consumers in emerging markets lack experience of sophisticated financial products. Even in well-developed markets, weak consumer protection and a lack of financial literacy can render households vulnerable to unfair and abusive practices by financial institutions—as well as financial fraud and scams operated by intermediaries. Improved consumer protection regulation is being implemented in many emerging markets. Policy makers are increasingly aiming to balance the country’s financial inclusion and participation objectives with consumer protection. For example the Insurance Regulatory and Development Authority, India’s supervisory body, recently announced several draft regulations for an open market consultation, which aims to reduce unfair practices and an information gap in domestic insurance in order to enhance market discipline among carriers and protect policyholders’ interests. Malaysia’s government is planning to introduce a new Insurance
  23. 23. Compensation Scheme to enhance protection for policyholders of life, non-life and takaful (Sharia-based) insurance. The proposal aims to protect policyholders from loss of claims or insured benefits in the event of an insurance or takaful carrier failing. people’s bank details. According to the Internet Crime Report 2009 of the US Bureau of Justice Assistance, the reported losses from cyber crime in the United States more than doubled in 2009, from $265 million in 2008 to nearly $560 million in 2009. Accenture believes that as these emerging economies mature, consumer protection regulation will increase. Insurance carriers will have to take this development into consideration when devising new products and sales strategies aimed at underserved segments of the market. Business and consumers need to be protected against these activities, and many insurance carriers have started to offer insurance against both identity fraud and Internet fraud. Cyber crimes pose a new set of risks which call for product innovation and underwriting skills to ensure that insurance carriers can profitably fulfill the growing need for protection against these types of losses. 6. Increase in cyber crime Cyber attacks and malicious activity continue to spread, and neither the economic recession nor geographic location has slowed cyber criminals. Cyber crime encompasses a host of crimes ranging from the non-delivery of merchandise after payment, advanced fee fraud, identity theft, credit card fraud, spam and the spread of computer viruses. Internet penetration around the world continues to increase, and as developing countries gain broadband access, cyber criminals have more targets. Attacks have evolved from simple scams to highly sophisticated campaigns targeting some of the world’s largest corporations and government entities. In addition, the Internet is an international medium that lacks international law enforcement procedures and cooperation, which slows efforts to fight cyber crime on a global scale. The annual cost of identity fraud to the UK economy is estimated to be £1.2 billion (approximately $2 billion), while the cost of online banking fraud in the United Kingdom was nearly £60 million (approximately $97 million) in 2009 after a sharp rise in the number of criminals using malware to harvest Figure 20. Complaints received by the US Internet Crime Complaint Center 336.66 2009 2008 275.28 2007 206.88 2006 207.49 2005 231.49 2004 207.45 2003 124.52 2002 75.06 2001 2000 50.41 16.84 Source: Internet Crime Report 2009, US Bureau of Justice Assistance 23
  24. 24. Changes in consumer behavior There are signs of fundamental changes in consumer behavior, a factor which will affect all insurers. The accelerating shift of demographic structures and the rapid development of online and mobile technologies are among the major forces driving changes in consumption patterns worldwide. On top of this, the recent financial market turmoil impacted the way consumers perceive their financial services providers. Figure 21. The Internet will grow faster than any other channel in all of the surveyed markets Loyalty on the decline Insurance company telephone service Recent Accenture research13 confirms that customers are increasingly disloyal to their insurance providers. Only one out of two consumers who intend to purchase insurance ‘in the next 12 months’ is planning to purchase from his or her existing provider. Clearly, customer retention will be a major challenge for insurers in the years ahead. Retailer Clear channel preferences The online channel is taking over as consumers increasingly consider purchasing policies via insurers’ websites or online intermediaries. As revealed by the above-mentioned Accenture study, 43 percent of consumers who intend to acquire an insurance product in the next 12 months plan to do it online. Numerous Internet price comparison sites and aggregators serve as starting points from which to hunt for the best offer. Usage of Web 2.0 applications, social networks and more mobile technologies change the way consumers interact, both with other users as well as with their service providers. 24 | The high-performance insurer of the future The proportion of insurance purchases/renewals online via insurers’ websites and aggregators will increase Question: How do you expect to purchase or renew insurance in the next 12 months? Insurance agent 49% Online (insurer’s website/aggregator) 43% Bank 27% Insurance broker 18% 16% 7% Base size = Respondents planning to purchase or renew insurance product in the next 12 months Channel behavior by country Question: How do you expect to purchase or renew insurance in the next 12 months? UK France Insurance agent Online (insurer’s website/ aggregator) Italy 67% 75% 17% 30% 70% 66% 21% 13% 38% 27% Insurance company telephone service 19% 27% 7% 8% 14% 11% Insurance broker 14% 21% 8% 10% 17% 16% Bank 14% 25% Retailer 5% 9% Next 12 months 34% 44% 4% 5% Germany 20% 22% 9% 8% Spain 48% 75% 76% 80% 46% 30% 10% 9% 21% 21% 57% 56% 33% 24% 19% 13% 20% 22% 18% 20% 24% 27% 9% 14% 4% 4% Brazil 64% 69% 28% 25% 34% 42% 7% 8% Previous years Base size = Respondents planning to purchase or renew insurance product in the next 12 months Source: Accenture Multi-Channel Distribution Insurance Consumer Survey: Changing Channels (2010) 54% 57% 10% 10%
  25. 25. These technologies are creating a new type of consumer that breaks the mould of the conventional middle class. This development is critical for insurers, because the middle class represents their most important target market given its size and financial clout. In Germany, for example, measured by standard income levels, more than 60 percent of the population belongs to the middle class. This large group of people used to be characterized by a relatively stable set of consumption attitudes and purchasing behavior across Western Europe. Insurers could thus rely on settled preferences regarding products, sales channels and marketing approach. In general, service and expectation levels used to be less demanding within this customer base. All this is changing as the age pyramid inverts and new consumer groups form. In parallel we observe a trend towards individualization as traditional family structures break down and an increasing number of people remain single. According to the European Statistics Office, every eighth European forms a single household, which in turn causes a wave of individualization in terms of purchase patterns and product preferences. Heterogeneity in emerging markets Emerging markets with their young, economically active, increasingly well-educated and upwardly-mobile populations are increasingly attractive markets for companies in other parts of the world. However, a marketing strategy and operating model developed for mature markets will not readily ‘travel’ to new markets, where consumers are culturally, economically and demographically quite distinct from consumers in mature markets. Emerging markets tend to be characterized by a large, fragmented base of new consumers with low purchasing power and highly localized needs. These large populations are spread over a vast geographic area characterized by cultural barriers and marked differences in lifestyle and language. For these reasons, and in contrast to most mature markets, branding plays a major role in emerging markets. In a recent survey on consumer goods, global information and media company Nielsen14 identified India amongst the top three most brand-conscious countries in the world. Upwardly-mobile members of the emerging middle classes wish to differentiate themselves in all areas of life, a strong desire that also applies to the financial services they consume. Multi-dimensional view of consumers a necessity Markets are developing in many different directions, with each market segment increasingly differentiated. As complexity grows, insurance carriers will need to develop a multi-dimensional view of their customers that supports more actionable segmentation and analysis. While demographic criteria are widely used among insurers, successful competitors will move beyond mere standard socio-demographic segmentation along indicators like gender, age, education level, occupation or income. Insurers need to factor in more sophisticated information to tackle growth opportunities in these diverse and complex markets. Insurers must understand customer behavior and preferences, aggregate information to know the breadth of their relationships with customers, and how customer value metrics can be used. Most insurers still lack a single view of their customers, reducing the effectiveness of their marketing, sales and customer service investments. Accenture firmly believes that winning segmentation strategies require a more holistic, detailed and expanded view of the customer. For example, insurers must incorporate value assessments such as cost-to-service and cost-toacquire in their assessment of customer segments in order to become more efficient and profitable while seizing growth opportunities. A deep understanding of customers’ attitudes (for example lifestyle, interests, risk tolerance), needs (for example buying and usage drivers, and benefits sought) and perceptions (for example of brands and beliefs) can help insurers develop a more individualized approach that supports up- and cross-selling. Successful insurance carriers will use actionable segmentation to serve customers more profitably and develop better products—all while building a loyal customer base. 25
  26. 26. The changing face of competition Over the last decades, sales structures in insurance tended to evolve slowly. However, disruptive changes in some markets indicate that the pace of change is likely to pick up dramatically. Accenture believes that there are four forces that will alter the face of competition in global markets and drive further change. 1. The return of the broker Brokers are among the most significant sales channels in mature markets. Based on information from the CEA, the European insurance and reinsurance federation, Accenture estimates that brokers account for 20 percent of the European insurance market—testimony to the fact that selling complex products to commercial customers is best handled personally by a non-exclusive expert. However, the strong traditional position of brokers has been challenged over the past years by other channels. For example in the German life insurance market, which is dominated by tied agents, brokers’ share of new business strongly increased to 32 percent in 2005 and then stagnated. In the UK personal lines property and casualty market, brokers have lost most of their foothold to the direct channel. To play to their core strengths, brokers had to take bold action. Radical consolidation, professionalization of advisory services, increased focus on segments, customers and products, and improved leverage of technology have helped them regain much of their former market in many countries. Overall, we believe this trend will continue, especially in continental Europe, which is currently still dominated by tied agents. 26 | The high-performance insurer of the future 2. The rise of the aggregator The rise of aggregators (for example, www.confused.com) in the UK market since 2003 marks another, more disruptive trend with regard to the ways in which insurers approach their customers. Acting as price comparison platforms and online intermediaries, aggregators have revolutionized the distribution of insurance in the United Kingdom. In the private motor business segment, they doubled their market share in 2008 to about 45 percent within a 12-month period. Market analyst Datamonitor15 suggests aggregatorinstigated sales could rise to 64 percent by 2011. Accenture sees aggregators as catalysts of structural change in the insurance industry, introducing a new distribution dynamic. Aggregators will pose significant challenges for insurance companies as price awareness will increase and customer loyalty will decrease; the resulting customer churn will impact profits. Competition will sharpen as online intermediaries facilitate the entry of new market players, who will not have to invest in sales power to gain market share. The rise of aggregators will require established insurers to make substantial operational changes. For example, they will need to develop their online capabilities to grab the opportunities opened up by aggregators. Insight-driven customer segmentation will be a prerequisite to gain and maximize customer value in this dynamic market. To take a larger share of the insurance value chain, future online intermediaries may take on policy/document fulfillment or claims services. And to seize the opportunities of entirely new business models, partnerships and alliances, online intermediaries may also serve as white-label platforms for new market entrants or brandassurers. Ultimately, aggregators have the potential of redefining what it takes to be an insurance provider. 3. New players Joint-venture and partnering models are changing the competitive landscape across the world. Insurers are teaming up with large non-traditional players or companies from other industry sectors. Information from data provider BvD suggests that both mature and emerging markets find joint ventures attractive: 40 percent of almost 400 joint ventures in the insurance sector since 2000 were established in the Far East and Central Asian region, with about 30 percent in Western Europe. Accenture believes that joint ventures will grow in importance over the next few years for two reasons. First, in these markets, gaining client access is crucial to quickly establishing a sustainable market position. In many cases well-established non-insurance players, such as telecommunication providers, can provide this access either through their own customer base and sales infrastructure or through access to their sometimes extremely large employee bases. Second, we observe increasing brand awareness among the new middle class in emerging markets. Apparently, brands are seen as a symbol of entry into the middle class and consumers are willing to pay a premium for them—another reason for insurance carriers to look for attractive non-traditional partners.
  27. 27. 4. From payer to provider Spotlight: Bajaj Allianz General Insurance Company Successful insurers will increasingly differentiate through excellence in customer servicing, an area that Accenture believes will change the face of competition. While many European players try to position themselves as “service insurers”, the definition of what a service is remains unclear. We believe there are three levels of service customers are looking for. In 2001 the German Allianz Group teamed up with the Indian wheel manufacturer Bajaj Group to form Bajaj Allianz General Insurance Company. Based on an impressive average annual growth rate of 34 percent over the last six years, Bajaj Allianz achieved a market-leading position in its segments. Bajaj’s enormous customer base, its wellknown and trusted brand and its widespread network of salesrooms across rural and urban India, enabled Allianz to gain a head start in the local insurance market. competitive advantage will require the capability to re-invent products and processes constantly. to recommend it to friends. From a financial perspective, Mondial Assistance controls costs through tight management of the provider network of mobile nursing services, breakdown services and so on. The basics A recent Accenture survey13 among consumers in five mature, Western European markets and Brazil revealed that consumers do not rate insurers highly when it comes to service. Consumers ranked “speed of problem resolution”, “accessibility anytime I need” and “knowledgeable and responsive phone support” as top criteria in their choice of insurance provider, but only 25 percent would recommend their current insurance provider. We can conclude that even though many insurers have reorganized their service operations to improve quality and accessibility levels, the survey results suggest that this level of service is not adequate to create a sustainable advantage. Simplicity Insurance is widely seen as a complex product with extensive application forms, numerous pages of hard-tounderstand terms and conditions and a claims process that is sometimes bureaucratic. Some insurers are accordingly positioning themselves as “the easy way to do insurance” with a reduced set of products, simplified processes and terms and conditions, and a growing number of self-service options. They target younger customer segments with higher expectations of usability and a stronger desire not to buy what they do not fully understand. While this is a relatively new and promising space, creating a sustainable Convenience Successful insurers will not limit their services to paying a claim but to providing a solution to the problem the customer is facing. In this way they not only provide a service that is superior and difficult to replicate, but can control the claims process better, thus lowering claims costs. Assistance offerings and managed health care services stand out as two major business models that show future growth potential. An impressive eight percent annual average premium growth rate over the last five years testifies to the success of “peace of mind” operator Mondial Assistance. The global market leader in its segment, Mondial Assistance serves about 250 million end-customers in the field of automotive, travel, health and life, pursuing its “helping people, anywhere, anytime” philosophy. Acting on the challenges posed by an aging customer base, the company develops innovative products and services in such areas as dependency assistance and chronic disease prevention. Mondial Assistance differentiates itself from traditional carriers in the customer service process. The company sees excellence in customer contact management supported by cuttingedge technologies as critical to its success. The results speak for themselves: the company’s 61 percent Net Promoter16 score contrasts sharply with the global industry average of 25 percent of consumers who are willing Sources: Bajaj Allianz, Accenture Research Accenture sees the same business logic applying to successful managed-care organizations. In times of higher public and private health-care spending, topranked US carriers like Aetna Health or Cigna focus on delivering affordable, quality-oriented health coverage to retail customers. Medical and health-care supply to enrolled members is limited to the managed-care organization’s network of health-care facilities and professionals. A variety of mechanisms help these organizations to control costs (for example, by providing monetary incentives to persuade health-care professionals to select less costly forms of care) while serving their customers’ demand for improved quality (for example, by checking if professionals meet certain standards and requirements). We believe that this field offers the most promising opportunities for insurance carriers to actually compete on service. A key challenge for them will be to decide and develop the optimum means to provide this service: through cooperation, joint ventures or through their own operations. Industry experience in auto repair networks suggests that only a few larger players will actually be able to build their own service networks to create a competitive advantage. Consequently, non-insurance service providers will become a much more important part of this industry. 27
  28. 28. The new normal Given the forces that will shape the insurance industry over the next five years it is easy to see that there will be no “back to normal” after the financial crisis. Much has been written already about the so called “new normal” and the implications are visible in the marketplace. Growth rates have been slow in 2009 and 2010, and profitability levels are much lower than they once were. Accenture believes that the new normal will be strongly characterized by significantly lower returns on equity than in the last decade—whereas ROEs of 15 to 20 percent were not too difficult to achieve prior to the financial crisis, in the next few years carriers that deliver 10 to 15 percent will be pleased with their performance. strong correlation between GDP and global insurance premiums, coupled with the assumption that economic activity and demand patterns will not simply return to pre-recession levels, constitute a clear warning signal for insurers. In order to maintain positive returns on equity over the next 10 years, they will need to implement major behavioral changes. And this will only be achieved by those that act decisively to respond to changed conditions. Insurers that employ the same strategies as before, and fail to develop the flexibility and new capabilities that circumstances demand, will be more likely to record ROEs of 5 to 10 percent. 1. Slow gross domestic product (GDP) growth We see five forces driving this development. 2. Low long-term interest rates The downward movement in interest rates is another major inhibitor of both growth and profitability levels. An adverse interest and capital market environment will reduce investment returns for both life and non-life insurers globally. Unfortunately, there are indications that this trend could The macro-economic view shows that recovery scenarios will most likely be protracted and anemic. Both the U-shaped and the L-shaped recovery trajectories project a much slower recovery in GDP growth than the more optimistic V-shaped scenario. The Figure 22. Perspectives on the new normal Pre-Crisis Recession 2007 2008 2009 GDP Growth 2010 New Normal 2011 2012 Extended recessionary/recovery period 12 6 Recovery Historical GDP = 2.7% Non-discretionary ‘big-ticket’ spending drops -0 Recession catalyst -6 -12 12 24 36 Unemployment rate increases Government stimulus and bank lending stimulus recovery 28 | The high-performance insurer of the future 'New Normal' unemployment rate decreases, stays at base rate of 5.5-6.5% 'U'–shaped recovery trajectory Discretionary spending drops Source: Accenture analysis 2013 48 60 72 'L'–shaped recovery trajectory Weakness in banks and credit markets prevents re-stimulation of economy, extending unemployment, creating ‘underemployment’ and forestalling GDP growth 'New Normal' GDP = 1.5%-2.5%
  29. 29. continue for some time. In addition, a capital market that is depressed and volatile will also affect the ability of life insurers to make new sales of unit-linked products. Because it will be more difficult to generate investment returns on policies with a capital guarantee, non-insurance retirement products will become more attractive to customers. The introduction of the SarbanesOxley Act in the US in 2002 heralded a tightening of regulatory restrictions on corporations that is being taken a level higher for insurers in the European Union by Solvency II. While this new directive has been welcomed by many EU-based carriers as imposing a set of standards that will ultimately benefit the industry, it is also acknowledged that it is likely to reduce their return on equity, in the short term, by approximately 2 percentage points. Property and casualty insurers will be increasingly squeezed by price competition that will intensify in a low GDP growth environment. In this environment, product innovation will be very rare and products will tend to become commoditized. This greater standardization will go hand in hand with improved transparency and sharpened price awareness, especially in personal lines. Slow market growth (GDP around 1.3%, financial market down, harsh reforms to control debt). Macro-economic axis Figure 23. Four scenarios for the future of insurance B A Finally, independent intermediaries will gain weight in the insurance business. Successful online aggregators in mature markets, for example, will try to grow their share in the insurance value chain by providing additional customer-centric services or taking on what were once seen as core competencies for insurers, such as claims services. In the process they will reduce the profits of traditional insurers. 4. Commoditization 3. Increased regulation Main indicators up (GDP 2.5% to 3%, financial market increase, state debt under control). 5. Stronger role of intermediaries Insurers elsewhere in the world have not escaped the implications of this trend. An abundance of new local regulations have been and are being introduced to protect consumers and investors, while global corporations often must comply with these regimes even if their head offices are located far away. • Downward price pressure due to product commoditization • Growth due to a booming economy 4.5% ROE: 5.1% Non-life Life • Price war to sell commodity products • Low growth due to stagnant market Impact of the new normal All these factors will shape the new normal for insurers, and threaten to further erode both the growth and profit prospects of insurers globally. Their combined impact was analyzed in a large-scale Accenture study17 conducted in a leading Western European country toward the end of 2010, and validated by industry leaders in the country. The key findings were captured in a set of four possible scenarios for the insurance industry over the next decade (Figure 23). C D • Consumers value personal advice and customized products • Market driven by economic ROE: growth 6.0% Non-life 7.5% Life • Demand for innovative and customized solutions to meet customers’ real needs at the right price • Sluggish economy creates budget constraints 4.7% 4.6% Non-life Life 1.0% -1.1% ROE: Non-life Life ROE: Forecast market size Consumer behavior axis Insurance as a standardized, non-differentiated product. Insurance as a value-added product; customer seeks advice from insurer. Source: The Western European Insurance Market 2020, Accenture November 2010 29

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